Ask the Experts!
The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.
Question: A client of mine is expecting an income windfall this year, and wants to know how he can reduce his income tax liability.
Answer: We get asked this question all the time. There are two types of opportunities to manage the income tax liability associated with one-time taxable income.
First, if the income has not yet been earned, sometimes it is possible to negotiate the manner in which it will be paid. For example, a business owner may offer to sell its services in installments over several calendar years instead of selling in a lump sum all in one year. Spreading the income over several years may lower the tax rate and thus, lower the overall tax bill.
Second, if it is not possible or desirable to negotiate the timing of the taxable event, the taxpayer can seek personal or business tax deductions to offset the income. These can include
- Pension contributions
- Deductible IRA contributions
- Charitable contributions
- Acceleration of deductible business expenses
In many cases, the available tax deductions will not be large enough to completely offset the income tax result associated with the windfall. While that’s a problem, it’s hard to feel overly sympathetic to a client who has a windfall to compensate for the tax problem.
Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.